About Employee Stock Purchase Plans |
|||||||
Companies offer Employee Stock Purchase Plans to employees to allow them the opportunity to share the success of the firm. A stock purchase plan enables employees to purchase their company's common stock, often at a discount from the market price. Stock options are perceived to be an effective employee retention and incentive tool. Stock purchase plans help employees think more like an owner, which aligns their interests with those of shareholders.
How do Stock Purchase Plans work?Under a typical Stock Purchase Plan, employees are given an option to purchase their employer's stock generally at a discounted price at the end of an offering period. Prior to each offering period, eligible employees indicate if they wish to participate in the plan. If the employee wishes to participate, he/she indicates the percentage or dollar amount of compensation to be deducted from their payroll throughout the offering period. The percentage or dollar amount employees are allowed to contribute varies by plan, however, the IRS limits the total purchase to $25,000 annually. Under most stock purchase plans, the purchase price is set at a discount from the fair market value. While some plans provide that the discount is applied to the value on the stock on the purchase date (e.g., 85% of the fair market value on that date), it is more common to apply the discount to the value of the stock on the first or last day of the offering period, whichever is lower. Most plans allow employees to increase or decrease their payroll deduction percentage at any time during the offering period. Each plan is unique, your plan materials will detail how a specific plan works. Two Types of Employee Stock Purchase PlansThere are two types of Employee Stock Purchase Plans, classified by their tax status: Qualified Employee Stock Purchase Plans (Section 423)Qualified Employee Stock Purchase Plans meet conditions described by Section 423 of the Internal Revenue Code. There is special tax treatment for shares that are held for more than a year. A qualified plan must meet the following requirements:
Non-Qualified Employee Stock Purchase PlansNon-Section 423 Employee Stock Purchase Plans are simple payroll deduction plans that allow employees to purchase company stock, sometimes at a discount. There is no special tax treatment of any proceeds, and the plan is not necessarily available to all employees. What are the Advantages of Employee Stock Purchase Plans?These plans are usually easy and convenient to set up and encourage saving and investing. Employees don't have to commit to a specific number of shares each pay period. They select a dollar amount or a percentage of a paycheck and every purchase period a number of shares are purchased based on contributions. |